EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

The Energy Tax Aspects of Washington, D.C. Area Buildings

The Energy Policy Act (EPAct), in section 179D, provides substantial tax
incentives for designers of qualifying energy efficiency projects in government
buildings. Washington D.C. is a particularly strong area for the EPAct designer
benefit because it is structured around a huge Federal government sector,
housing each branch of the Federal government, including virtually all
government agencies. With an expanded Federal government, the Washington area,
including new facility construction and existing building renovations, has the
potential to be the leading area in the country with regard to EPAct designer
benefits. Since new Federal buildings are required to be LEED certified and
existing Federal buildings have mandatory energy reduction targets, Washington
D.C. presents substantial EPAct tax deduction opportunities for the building
design community.

EPAct 179D Tax Deductions

Pursuant to EPAct Section 179D, building owners or tenants making qualifying
energy-reducing investments can obtain immediate tax deductions of up to $1.80
per square foot.

If the building project doesn't qualify for the maximum $1.80 per square
foot immediate tax deduction, there are tax deductions of up to $0.60 per
square foot for each of the three major building subsystems: lighting, HVAC
(heating, ventilating, and air conditioning), and the building envelope. The
building envelope is every item on the building’s exterior perimeter that
touches the outside world including roof, walls, insulation, doors, windows and
foundation.

EPAct 179D Designer Benefits

As part of section 179D, the designers, including architects and engineers,
of government owned building new construction or renovation projects, can claim
the EPAct tax deduction. The intent with the Section 179D designer benefit is
that the government property owner is supposed to receive the larger economic
benefit, which is the permanent perpetual energy savings, and the private
designer receives the onetime tax incentive for achieving the prescribed energy
efficiency targets. The hope is that with the tax incentives in place for
government building designers, the entire sector will become experts when it
comes to energy efficient building equipment and use their expertise in private
building projects as well.

The Washington D.C. Design Community

The Washington D.C. has a numerous government buildings including some very
large ones. The following chart illustrates the potential EPAct tax deductions
for some of the most well known and largest government buildings in Washington
D.C.:

The Washington D.C. area employs a tremendous number of design professionals
including architects, engineers, lighting designers and design and build
contractors that support the government sector. In fact, many large national
architecture and engineering firms have their national office and/or largest
office in the Washington D.C. area. All of these government building design
firms have the opportunity to earn large EPAct tax deductions if their designs
meet the Section 179(D) targets.

The Department of Energy’s Forrestal Building has undergone as large
of an energy efficiency transformation as any Federal building in Washington
D.C. In 2007, the Forrestal Building became only the second Federal building in
the country to be awarded the energy star label. Some of the energy efficient
improvements made to the building in recent years include installing solar P.V.
on a large portion of the building’s roof, upgrading to highly efficient
fluorescent and LED lighting, and installing automated HVAC control systems .
As can be seen in the above chart, the EPAct tax deductions for the Forrestal
Building design teams could be quite substantial.

LEED Certification Explained

LEED, which stands for Leadership in Energy and Environmental Design, is the
fast growing marquee standard for sustainable buildings established by the U.S.
Green Building Council (USGBC) . Since the USGBC's introduction of LEED in
2000, the rating system has become the national standard for green building
certification; with more than 25,000 registered LEED buildings in the country .
There are four LEED certification levels, with LEED platinum being the highest
recognition. Energy efficiency accounts for a substantial percentage of the
points required for LEED certification; therefore, it is probable that a LEED
building will qualify for some level of EPAct tax deduction.

New Construction/Major Renovation LEED Mandates

Various Federal government departments currently require all new and
substantially improved government buildings to meet LEED certification
requirements. In addition, starting in 2012 all Washington D.C. commercial
buildings 50,000 square feet or greater will have to meet or exceed LEED New
construction 2.2 or LEED core and shell 2.0 standards. Post secondary
educational facilities also have to meet these same standards.

In order to receive HVAC and building envelope EPAct deductions the building
must be modeled using IRS approved modeling software . The tax advantage for
LEED certified buildings is the fact that they are already modeled. Experienced
tax experts with engineering backgrounds know how to convert an existing LEED
model into a tax model.

Existing Federal Building Energy Reduction Targets

Section 431 of the Energy Independence and Security Act of 2007 set out a 10
year Federal building energy reduction plan. The energy reduction goal for new
and major renovation projects is approximately 3% each year until 2015, with
the ending target being an overall 30% energy use reduction.

LEED Knowledge Transfer-Developing Modeling Expertise

The Federal government LEED and energy reduction mandates are creating a
large cadre of design professionals that are both experienced LEED
professionals and building energy management experts. For example, Gensler a
leading national architecture firm has over 400 LEED professionals in its
Washington D.C. office. The large and expanding cadre of LEED experienced
engineers is resulting in huge increase in the number of design professionals
who are familiar with building energy simulation modeling. This expanded
modeling expertise is the key to securing the larger HVAC and building envelope
section 179(D) tax deductions where modeling in IRS approved software is
required. The focus on existing building energy reduction is expanding the
number of design professionals who know how to make a building substantially
more energy efficient, which is also important knowledge to transfer to the new
building design process.

Parking Garages

Many Washington D.C. buildings have large adjoining parking garages that can
save substantial energy costs and generate large tax deductions by upgrading to
energy efficient fixtures. In Notice 2008-40 issued March 7th, 2008, the IRS
announced that parking garages are a property class that is specifically
entitled to use the EPAct tax deductions. Also, parking garages are excluded
from the tax bi-level switching requirement . Typical energy efficient lighting
technologies that meet the EPAct requirements include fluorescents, induction
and LED lighting.

LED Lighting

For building interiors, the first major building category to move to LED's
was parking garages. Electricity costs for lighting is essentially the
exclusive energy cost for garages which often have high electricity costs due
to 24 hour operation often required for security purposes. Now we are seeing
the LED market quickly expand and the LED lighting industry is in position for
broad expansion into the office building market .

As indicated in a recent LED magazine article, “Dramatic improvements
in commercially available LED performance in recent years, as well as
significant cost reduction, has made it feasible to design LED lamps to offer
comparable lumen output and to compete with other established lighting
technologies on the basis of cost of ownership .” The L.E.D. Industry has
many major nationwide initiatives to accelerate L.E.D. installations and to
spread the word about this most efficient lighting technology on the market.

Washington D.C. Energy Benchmarking Law

Washington D.C. is one of the five major U.S. jurisdictions to have recently
enacted an energy benchmarking and disclosure law . Starting in 2009, all
district owned buildings over 10,000 square feet are now required to benchmark
energy using the EPA’s portfolio manager. Also, starting in 2011 for
buildings built before 2009, and for those built after 2009 two years after
building completion, all district owned buildings are required to publicly
disclose all energy benchmarking information. The D.C. benchmarking law also
started to apply to privately owned buildings in 2010 and by 2013 all privately
owned buildings over 50,000 square feet will have to benchmark energy use and
disclose the information.

When looking to lease a building, a prospective lessee in Washington D.C.
will now have building energy use available to factor into their decision
making. In order to stay competitive in the lease market and to comply with
energy reduction, benchmarking and disclosure requirements, an astute
Washington D.C. property owner should consider upgrading to energy efficient
building equipment and take advantage of the EPAct tax deductions supporting
their investment.

Conclusion

The large concentration of government buildings with LEED and energy
reduction mandates is greatly increasing the overall building design and skill
set of the Washington D.C. building design community. This is exactly the
purpose of the Section 179(D) designer benefit. Design professionals serving
the government market are eligible for Section 179(D) designer tax incentives
for achieving energy efficient design and they can use their new found
knowledge to improve design practices outside the D.C. area. They can also
apply these same techniques to the private sector portions of their
practice.